Management Consulting Myths

By James Kwak
Two people forwarded me Johann Hari’s Huffington Post article about management consultants, provocatively titled “The Great Management Consultancy Scam — and How it Could Be Coming for Your Job.” It seems that someone is once again bashing management consultants as witch doctors and scam artists, and I, improbably, must come to their defense. “Improbably” because I am generally critical of management consulting, and I have spent many hours with former McKinsey colleagues talking about how little we knew back when we were consultants. I am frequently asked by other students whether they should become consultants, and my general answer is, in a nutshell, “It’s a lousy job, and not nearly as exciting as the recruiting pitch makes it out to be, but it’s a good thing for your resume if you actually want to be in the business world.” (If you know me and are actually considering becoming a consultant, feel free to call me.)
Hari’s article is largely based on books by former consultants, primarily David Craig’s “brave” memoir (written five years ago; David Craig is a pseudonym). Here’s a quote from Craig: “We were proud of the way we used to make things up as we went along. . . . It’s like robbing a bank but legal. We could take somebody straight off the street, teach them a few simple tricks in a couple of hours and easily charge them out to our clients for more than £7000 per week.” According to Craig (according to Hari), all of management consulting boils down to recommending that the client lay off thirty percent of its staff, after one week of observation and analysis.
Hari also cites Matthew Stewart, for whom (according to Hari) consulting was also all about firing people: “he was taking a fortune in payments, and firing thousands of productive people.” That is not really what Stewart is about, at least according to his own article, although I don’t agree with him either.
Here’s where I need to give my disclaimers. I was only a consultant for a little less than three years, from 1997 to 2000. I only worked at one firm, and only in two offices of that firm. So my experience may not be representative. But since McKinsey is widely considered the premier management consultancy, any criticism that doesn’t apply to McKinsey somewhat misses the mark.
I worked on nine client projects during my time in consulting, and only one and a half had anything to do with cost-cutting.* In both of those cases, a large proportion of the cost savings came not from firing people, but from dealing with various systems problems. (And in neither case did the recommendations come after one week.) The other projects were a combination of strategy, mergers and acquisitions, entering new markets, and implementing new processes.
Besides the supposed focus on cost-cutting, another part of the stock criticism repeated by Hari is that consultants take untrained people right out of school and bill them out for large amounts of money. This is true, but it misses the point. Yes, it may seem shocking that new consultants cost 7000 pounds per week. (That’s Craig’s figure—if I told you the McKinsey numbers, the Firm** might send someone to kill me and make it look like an accident.***) But they get it because those people, as part of McKinsey teams (I’m not going to speak for the competition), do work that most large corporations are simply incapable of doing internally.
The fact is that first-year McKinsey associates are very smart, very ambitious, very hard-working, and very insecure people. That insecurity is crucial, because it means they will metaphorically kill themselves before they will fail to do whatever they are asked to do, even if it is typing hundreds of numbers from printed reports into a spreadsheet and averaging them, or flipping through dozens of bound reports to make sure that none of the pages was photocopied incorrectly. Plugged into a consulting team, they provide leverage—the ability to get large amounts of moderately high quality work out of a team where only a few people—the more senior members—know what they are talking about.
Now, there should be a cheaper way to get the same results than hiring McKinsey to get them for you. But most companies, for whatever reason, are incapable of doing it internally. Any company only has a finite number of smart, ambitious, hard-working, insecure people. And—here’s the problem—they are already doing the most important jobs in the company. They are running business lines, or designing products, or selling products, or keeping important customers happy—all the things a company has to do to be successful. They can’t be spared to go work on some consulting project. I’ve seen internal consulting arms of Fortune 500 companies and, believe me, you are better off paying the premium and hiring McKinsey. My old software company had a higher proportion of overachievers than any other company I have ever seen, and there is no way we could have spared four good people to work full-time on some research project for four months.
So what’s the secret to the McKinsey model? There are a few, and they are interconnected. One is that, however they did it, they created an institution that is prestigious enough to skim off some of the top people produced by our educational system—which is, at its high end, probably the best in the world. Then, having secured those people, they figured out how to resell them to ordinary Fortune 500 companies—who can’t hire them out of college, because what twenty-two-year-old wants to work for Proctor & Gamble?—at a huge premium. Sure, the clients aren’t always happy. But they don’t really have a choice. Because every now and then, a big company has an important question, like whether or not to enter a new market, and it cannot find the people internally to answer the question (again, because the best ones are too important to take away from their day-to-day jobs). And the question is so important that it dwarfs the premium that McKinsey charges relative to other consulting firms.
Is this good? Hari talks about how “the better you treat a workforce, the better they work,” and I agree with that. But McKinsey is not going around telling companies to abuse their workers (at least not the large majority of the time), unless it’s changed drastically in the past decade. Maybe the other management consulting firms really are as bad as Craig and Stewart make them out to be; I have no idea. Big companies do need people to study important questions now and then, and for many of them management consultancies are the only way to find those people. They should always read the reports carefully, understand all the assumptions, and challenge the conclusions. But if they do that, management consultants are not a bad way to get the grunt work done.
There is a more intelligent criticism to be written about management consulting. And there is a better way for companies to use management consulting services. But those will have to wait for another blog post, or for my own memoir (which is somewhere in the backlog of books I’m planning to write but probably won’t get to). If Craig’s and Stewart’s books are anything like Hari makes them out to be, though, they’ve missed the point.
* One project had two parallel components, one of which involved cost-cutting.
** Yes, (some) people at McKinsey do refer to their company as “the Firm,” with a capital “F.”
*** That was a joke. But McKinsey is very serious about confidentiality, and I see no reason to betray its confidences.

Related

It ranks among the most intriguing questions of modern business: How can the name McKinsey & Company be so well known while, at the same time, almost nothing is known about them? The answer: Because that’s the way they want it.
As the world’s premier management consulting firm, McKinsey consultants whisper in the ears of power from more than 100 offices in 60 countries. And not just in the executive suite—government leaders from President Obama to Tony Blair have called on the secretive firm when they need help solving their most vexing challenges.

McKinsey is famous for skimming the best from America's elite universities, a practice that has become common at top consultancies. The pathway between Cambridge and the company was so well-trod that it's been referred to as "McHarvard."

Management consulting is one of the most consistent and dependable employers for MBAs, the industry looks for people who can combine analysis with presentation skills and management insight. But graduating Harvard Business School doesn't give you the ability to immediately understand unfamiliar industries.

Oracle is all about the cloud these days, its execs say. But there's a dark side to how Oracle is achieving some of those cloud revenues, a consultant tells Business Insider. It involves pressuring some of its customers to add cloud to their contracts that they neither want nor plan to use by using a tactic insiders call "the nuclear option."

Greg Smith's op-ed in the New York Times "Why I Am Leaving Goldman Sachs" is precisely the catalyst that will eventually bring reform to the securities industry.
Denial Coming Up
Unfortunately, neither the Fed nor the SEC has any inclination to do anything about industry-wide fraud and corruption, therefore immediate results are not forthcoming.

As a career consultant for midlife professionals for the past 10 years, I’ve encountered thousands of people in literally every phase of career transition you can imagine – some are experiencing great success but want more leadership responsibility and recognition; others have been brutally beaten down by their corporate jobs, then laid off. Some are starting exciting new ventures; others have just been passed over in their corporate jobs by younger employees. Some are hitting their strides in their small businesses, and others are experiencing the utter desperation of not being able to fi